Austerity drive, spending cuts risk fickle growth, says Nomura

The government's austerity drive announced today, would lead to a saving of up to Rs 40,000 crore or 0.3% of the Gross Domestic Product (GDP) but poses risks to growth, Japanese brokerage Nomura has said.

"On our estimates this would amount to a saving of Rs 35,000 to Rs 40,000 crore or 0.3% of the GDP," it said in a note issued here today.

The finance ministry issued a circular today instructing government departments to cut discretionary spending by 10%. As part of these measures, it banned first class travel by government officials, meetings in five-star hotels, purchase of cars and froze new appointments.

Nomura said that the move may have been initiated as a precaution against potential shortfall in capital receipts, mainly disinvestment proceeds, where the government target is to raise 0.5% of GDP or over Rs 43,000 crore.

Moreover, with reports saying that the government is looking at an additional capital infusion of upto Rs 11,000 crore into state-run banks, this could be undertaken with an eye on additional spending needs, it said.

"Overall, these measures reaffirm the government's commitment to fiscal consolidation and its ability to meet the budgeted target of 4.1 percent of GDP in FY15," it said.

However, the brokerage said that spending cuts pose "downside risks" to its GDP growth estimate of six% for the fiscal.

"Such measures are intended at promoting fiscal discipline, without restricting the operational efficiency of the government," a finance ministry statement said.

"In the context of the current fiscal situation, there is a need to continue to rationalise expenditure and optimise available resources," it said.